Now that the Fed ended its quantitative tightening program earlier this month, will we see a return to printing money through quantitative easing? Let’s take a closer look.
Now that the Fed has ended quantitative tightening, will we see a return to quantitative easing?
Depending on whether a central bank’s priority is to maintain monetary stability or to stimulate the economy, it has several tools at its disposal. The most well-known variable in the market is the federal funds rate, which can be lowered or raised depending on economic conditions.
Two other opposing instruments can also be used:
- Quantitative tightening (QT);
- And quantitative easing (QE).
The former refers to a program in which a central bank sells debt held on its balance sheet on financial markets, thereby reducing the money supply in an effort to slow inflation. Conversely, a QE program is characterized precisely by an expansion of the money supply, with the central bank adding debt to its balance sheet to stimulate the economy.
On December 1, the U.S. Federal Reserve (Fed) ended its quantitative tightening program, and as a result, we might wonder if quantitative easing is set to return soon. If so, this could boost the markets, including Bitcoin (BTC), but it could also trigger a further acceleration of inflation in the months following this decision.
For now, a return to QE does not yet appear to be on the agenda, although some signs point in that direction. While the Fed indicated last month that its reserve levels were “somewhat above the appropriate level,” John Carroll Williams, president of the New York Fed, explained that the next step was to determine when those levels would then become “appropriate”:
It will then be time to begin the process of gradual asset purchases that will maintain an adequate level of reserves as the Fed’s other liabilities increase and the underlying demand for reserves rises over time.
While historical data show that periods of QT and QE have sometimes followed one another directly, the reverse is also true, particularly between 2014 and 2018, as shown by the Fed’s balance sheet expressed in millions of dollars:
Fed Assets
With a balance sheet of $6,535.78 billion, it is worth noting that the Fed’s assets remain well above pre-COVID levels, even though the balance sheet has returned to its April 2020 level.
Over the coming weeks, we will learn more about the central bank’s upcoming plans and observe the market’s reaction. In the meantime, projections for key interest rates indicate a nearly 90% probability of a 25-basis-point cut on December 10, bringing the range to 375–400 points.
